Short selling is a trading strategy that bets on the share price – investors borrow a stock from a fund in order to sell it, then buy the stock back once the price has dropped and return it to the lender.
It means the market isn't confident in either of these companies, which were already struggling for separate reasons before 2020, when COVID-19 put yet another nail in the coffin.
Education giant Pearson, shorted at 8.7% by eight funds, has been struggling amid the recent shift to online learning leading to a string of profit warnings, which has only been exacerbated by global lockdowns forcing schools to close.
In fact, revenue in the nine months to September slipped 14% from 2019, with all segments but online posting a fall.
In October, former Walt Disney International chair Andy Bird joined as the FTSE 100 group’s new chief executive, but analysts say it will be tough turn the business around quickly.
Interestingly, some City analysts have been upgrading the stock, with UBS reckoning Pearson can benefit from the opportunities of online in the non-formal education sector as well as the US higher education market.
Meanwhile, Cineworld has been one of the obvious COVID-19 losers after it was forced to shut hundreds of its cinemas due to restrictions in the UK and US last spring.
It could have kept them open in October but decided to shutter them anyway after major film releases, such as the latest James Bond, were postponed to 2021 over concerns viewers wouldn’t flock to cinemas in fear of catching the virus.
It’s not clear how long production studios are willing to wait, after Universal chair Donna Langley said last week there are likely to be further delays amid the current uncertainty, while Warner Bros is among those planning to release films online at the same time as they go into cinemas.
Cineworld, with 9.7% of its stock shorted by ten funds, was given a US$750mln lifeline by banks last month which would keep it afloat until next May.
With the new borrowing, Cineworld’s loan facilities rise to US$4.9bn at an average interest rate of 4.5%. According to the latest financial reports, net debt stood at US$8.1bn as of June 30, 2020.
Pearson was doing better only in relative terms, as it sat on a £982mln net debt pile on the same day.
Pearson rose 1% to 676.4p on Tuesday afternoon, after a rollercoaster year that touched lows of 432p in June, so short sellers may just be waiting for the next plunge.
Cineworld, instead, shed 2% to 66.3p after rocketing over 170% since October lows, although it was changing hands for 191p a year ago.